2024 (2) TMI 1489 - HC - Income Tax

Transfer pricing adjustments annulled as TPO improperly compared controlled transactions violating Section 92F(ii) requirements

PR. COMMISSIONER OF INCOME TAX -2 Versus M/s COIM INDIA PVT. LIMITED

The HC upheld ITAT's decision annulling TP adjustments made by TPO and DRP. ITAT found that while TPO and DRP accepted TNMM as the most appropriate method ... TP Adjustment - Selection of MAM - ALP adjustment of international transactions from Associated Enterprises - HELD THAT:- ITAT has principally faulted the decisions and directions rendered by the TPO and DRP upon finding that the assessee had adopted the Transactional Net Margin Method/TNMM as being the most appropriate method for the purposes of computation of ALP which was never discarded. It has found on facts that even though neither the TPO nor the DRP doubted that TNMM was the most appropriate method, they had proceeded to direct additions as noticed above. It has also adversely commented upon the TPO as well as the DRP undertaking an exercise in seeking to re-evaluate the cost of raw materials purchased. Insofar as this aspect is concerned, it has found that both the TPO as well as the DRP erred in proceeding to consider issues which travelled far beyond the determination of ALP. It has also been found on facts that the TPO has compared controlled transactions with other controlled transactions, losing sight of the imperative of the comparison being made with “uncontrolled transactions”. It has thus found that the direction as framed would clearly be contrary to Section 92F(ii) of the Act and which mandates that ALP would be the price identified for a “transaction between persons other than associated enterprises in uncontrolled conditions”. Additions have come to be annulled. The view as taken by the ITAT cannot possibly be faulted. No substantial question of law. Issues:1. Assailing the judgment rendered by the Income Tax Appellate Tribunal (ITAT).2. Determination of Arm's Length Price (ALP) in respect of international and domestic transactions.3. Adoption of Transactional Net Margin Method (TNMM) for computation of ALP.4. Alleged errors in adjustments proposed by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP).5. Comparison of controlled transactions with uncontrolled transactions for determining ALP.Detailed Analysis:1. The Principal Commissioner filed appeals challenging the ITAT judgment for Assessment Year (AY) 2013-14 and AY 2016-17. The respondent, a company trading polyurethane products, submitted its Return of Income for AY 2013-14. The TPO suggested cumulative adjustments totaling INR 5,62,52,600 under various heads. The Assessing Officer framed a Draft Assessment Order, leading to objections before the DRP and a Final Assessment Order adding INR 5,62,52,600 on account of ALP and INR 37,298 for depreciation disallowances.2. The ITAT allowed the assessee's appeal, prompting the Principal Commissioner to raise questions regarding the ALP adjustments proposed by the TPO. The ITAT faulted the TPO and DRP for not discarding the TNMM adopted by the assessee. Citing a judgment, the ITAT emphasized that the TPO cannot proceed further without discarding the methodology of the assessee. The ITAT found errors in the TPO and DRP's approach, noting that they compared controlled transactions instead of uncontrolled transactions, as mandated by law.3. The ITAT criticized the TPO and DRP for broadening the base for arriving at the profit margin and introducing methods outside the rules. It highlighted that the TNMM was deemed the most appropriate method, and any distortions should have been addressed within its framework. The ITAT found the TPO's actions contrary to law and criticized the DRP for affirming them. The ITAT concluded that the TPO's actions were bad in law based on the judgment cited.4. The ITAT annulled the additions based on a cumulative consideration of the errors made by the TPO and DRP. The ITAT found that the direction taken by the TPO and DRP was contrary to the provisions of the Income Tax Act. The ITAT held that the appeals did not raise any substantial question of law and consequently dismissed them.